Handling Employment Disputes: Practical Insights for CEOs and Business Owners

Introduction

Business leaders often encounter legal challenges, particularly from former employees who are dissatisfied. Knowing how to manage these disputes efficiently can protect your company and help maintain a positive workplace environment.

Stages of an Employment Dispute

1. Initial Complaint

  • Employee Grievances: Claims from former employees may include wrongful termination, discrimination, or other allegations of illegal employment actions.
  • Legal Grounds: These claims typically involve alleged discrimination based on characteristics protected by law, violations of whistleblower protections, or claims of a hostile work environment.

2. Legal Representation and Contingency Arrangements

  • Employee’s Legal Aid: Ex-employees often seek lawyers who accept payment only if the case is won, due to the financial burden of hourly legal fees.
  • Law Firm Screening: Firms focused on employment law usually accept only those cases that have a substantial legal foundation, rejecting many because being unfair does not always mean being unlawful.

3. Employer’s Response

  • Insurance Coverage: Acquiring Employment Practices Liability Insurance (EPLI) is a wise step for businesses as they expand, helping cover potential legal expenses.
  • Hiring an Attorney: Employers should engage with an employment law attorney to address claims effectively and ensure compliance with legal standards.

4. Legal Proceedings

  • Demand Letters and Negotiations: The process often begins with a demand letter from the ex-employee’s lawyer, leading to negotiation to resolve the dispute without court involvement.
  • Settlement Discussions: Resolving disputes through settlement can prevent the uncertainties and costs associated with a trial.

5. Mediation and Court Trials

  • Mediation: This option is pursued when both parties are open to finding a middle ground, often leading to a settlement.
  • Court: If mediation fails, the case may go to trial, requiring substantial time and resources, including the gathering of evidence and depositions.

Strategic Considerations for Business Leaders

Legal Preparedness

  • Preventive Measures: Implement clear employment practices and keep thorough documentation to reduce legal risks.
  • Legal Consultation: Stay informed about employment laws and potential liabilities through regular consultations with your legal advisors.

Financial Considerations

  • Cost-Benefit Analysis: Weigh the costs of legal defense against settling. Consider how these decisions impact your company’s reputation and daily operations.

Emotional and Operational Impact

  • Company Morale and Operations: Legal disputes can be resource-intensive and divert attention from your business objectives. Maintaining a constructive work environment and clear communication helps minimize disruptions.

Conclusion

Managing legal disputes with former employees demands a balanced approach that includes solid legal defense and thoughtful negotiation. Business leaders should foster a culture of fairness and legal adherence, prepare for potential disputes through appropriate insurance and expert legal advice, and address each case with the seriousness required to safeguard the company’s interests.

Video Transcript:

Employment Dispute Guidance for CEOs and Business Owners

From time to time, CEOs and business owners have asked me, “What should they expect in a dispute with a disgruntled ex-employee? How does that process usually play out? What are the different stages? What are the steps, the legal considerations, and the ego and emotional considerations at play here?” I have worked with several companies who would have dealt with difficult employees who they have had to let go.

The Challenge of Termination

Often, that termination meeting didn’t go well, or there might have been months leading up to that, that didn’t go well. You may have an employee who is disgruntled, angry, and frustrated. Maybe that employee feels entitled. Entitled to something. They felt like they weren’t paid enough, and it had nothing to do with their performance.

Legal Claims Arising from Termination

It had something to do with, maybe, a classification that they are in. Like ethnicity, gender, age, religion, et cetera. Whatever the reason, employees who are terminated often bring claims of wrongful termination, discrimination, violations of whistleblower protection, hostile work environment, or other sorts of claims of illegal employment conduct.

Importance of Employment Practices Liability Insurance (EPLI)

And so, as a business owner or CEO, it is helpful for you to understand what this looks like. First, if you have employment practices liability insurance, which is abbreviated EPLI, you can typically take those claims and turn them right into your insurance company. So once you start getting 10, 15, or 20 employees, that is typically the point you start to think about, “Maybe we should just get some insurance because if we have one claim of employment misconduct. You will probably spend many times more in legal fees than you would having that insurance policy in place.”

Handling Claims Without Insurance

All right. So let’s say if you have an insurance policy in place, you can turn the claim over to the attorney, and the attorney will handle it. If you don’t, you typically will hire an attorney because what happens is that the employee goes out, and typically they can’t find an attorney.

Or I should put it this way, they will typically look for an attorney who will work on a contingency basis. In other words, the employee probably isn’t going to pay an employment attorney an hourly rate because usually, employees don’t have that kind of money. And so the entire legal profession around employee rights is based on contingency work.

Evaluation of Claims by Legal Professionals

In other words, the attorney says, “You don’t have to pay me by the hour. I get a percentage of whatever I recover for you.” So the employee goes to an attorney in an employee rights law firm. Now I can tell you on average, statistically, that law firm will reject 19 out of 20 potential cases. Why? Because most people who got fired think it was unfair, but unfair is not the same as illegal.

So the law firm is going to look at, not just whether was it unfair, but whether was it illegal. Did it specifically violate some law? Typically, that is going to be discrimination based on race, religion, or one of the other protected classes. It is going to be some sort of sexual misconduct on the part of management, negligence regarding sexual assault, or discrimination on the part of management. It might be a whistleblower claim, or it potentially could be a hostile work environment.

The Economic Considerations of Legal Representation

But what most people think is a hostile work environment is just rudeness and jerks. It has to be pretty bad, pretty hostile, to reach the level of being considered hostile in a legal setting. So the employment attorney will consider all these cases. And even if something illegal happened, it doesn’t mean the attorney will take the case because the attorney has to think now, “How much money can we recover?” Usually, attorneys say to themselves, “We need to recover on the cases we win about three times whatever our normal hourly rate would be.” So think about it. If the claim is for $1,000, the attorney may say, “I can’t take that case. Even if we win, it is too small. I would get a third of a thousand dollars. That is just not enough.”

Negotiation and Settlement

Now, some statutes allow for the recovery of attorney’s fees or other sorts of penalties. And so in those cases, employment attorneys may be able to recover enough money to justify taking the case, even if the case is small.

One example of that is often, a dispute over how much the employee was entitled to receive. If the employee was working overtime and not receiving time and a half, or if the employee was paid a salary and should have been getting paid by the hour, which would have resulted in a lot higher pay.

Those are cases where, at least in Minnesota, the statute allows the attorney to recover more than just the amount of money the employees owed. There is typically going to be a penalty and a right to attorney’s fees, at least after certain points. So if an attorney takes a case, usually it is on a contingency basis.

Legal Strategy and Response by Employers

Now, the attorney documents everything the employee says and typically puts together a demand letter to the employer. The employer will typically read through that and often disagrees with a lot of it.

Usually, it is the best practice for the employer to hire an attorney at that point to articulate a response. And here is why. Because employers often will sit and argue over things that are not important but were included in the letter. An employment attorney understands what is illegal and what is not and how to limit response to the legal issues, and simply note that we are not going to get into a petty squabble over little issues that are not legal.

Of course, in every situation, there are all sorts of details, and people can argue until they are blue in the face. That is not important. An attorney is going to stick to what are the big issues that actually could be a loser for the company in court, and we will either address those factually or point out what the law is.

Now, typically, the attorney representing the employer, the company, is going to talk with the employer about potential exposure, maybe mistakes that were made, or risks that they have. Usually, these cases are negotiated, and there is some sort of settlement.

Now, it could be that the employer knows that they have a very strong case, but they would have to fight it out in court, and they don’t want to do that. And so the employer says, “You know what? We will offer a little, even though we are not wrong, we just want to make this go away. We will have to offer a few thousand dollars.” Typically that is part of a response letter, which says, “We didn’t do anything wrong, but to make this go away and to resolve it without any admission of liability, we will offer X amount.” Maybe it is $2,000, maybe it is $5,000.

But other employers and some big Fortune 500 companies are known for this: “Say, you know what? We are going to fight every single one to the end because once we start paying out to anybody who brings a claim, we are just inviting more employees to bring claims against us, even though there is no merit to those claims. We need to establish a reputation that we fight these to the end, and that sends the message to the employment attorneys. You better only bring good cases, because if you bring frivolous cases, you are going to have to fight them out in court, and we are going to even try to get attorney’s fees for you bringing a frivolous case.”

So it puts some pressure on the employment attorneys taking this case on a contingency basis to say, “Do I want to take this case and fight it out to trial, which might cost a couple hundred thousand in legal fees? Is it worth it against this employer?” When employers have established that sort of reputation, the employment attorneys don’t take a lot of the small and weak cases, but most small businesses don’t have enough claims against them to establish a reputation of that type. Also, small businesses don’t have the kind of legal fees to fight these cases for years.

So, because the small businesses don’t have a budget, often they will make some sort of severance payment or separation payment just to make the issue go away. But it depends. It depends. Sometimes employers just say, “You know what? It is about justice and doing the right thing. And I am not going to pay this person who caused so much trouble for our business. I am not going to pay him now again due to some sort of frivolous claim.” So that is what that conversation usually looks like between the employment attorney representing the company and the business owner or business CEO.

You may have some correspondence go back and forth between the employee’s attorney and the company’s attorney. You might have some mediation. Maybe they agree to go to some sort of mediation, which often suggests that there is going to be some sort of settlement there. Parties usually don’t go to mediation if they are dead set against some compromise. The purpose of mediation is to acknowledge there is room for compromise. Let’s see what that looks like.

And then sometimes these cases go to court, and it can be very time-consuming for an employment attorney to take these kinds of cases to court. Usually, employment attorneys only want to take the good ones. Likewise, it can be time-consuming and draining for the company because, whenever you are in a lawsuit, it is not just money for the attorneys. It is the stress. It is the sense of injustice that eats at you daily. Your friends and family ask about it. So you are talking about it. It is a very negative, toxic conversation. Also, for a business, it can interfere with running the business if you have to gather up data in response to discovery requests.

Conclusion

That is where the employment attorney representing the employee asks for information they are entitled to during the normal exchange of information in a lawsuit. The employment attorney can ask for documents, computer evidence, and any other information relevant to the issues in dispute. The employment attorney can do a deposition of any employees who know the situation.

So that typically means they are going to subpoena and have a deposition where they ask questions of coworkers and managers of the ex-employee. This can be intrusive. It can reveal a lot of information to a public court that the company might desire to keep confidential, and it is just a distraction from the normal operations of running a company. It also really can affect morale. So if you are a CEO or a company owner, this gives you an idea of what happens in an employment dispute with an ex-employee.

I am Aaron Hall. I am an attorney for business owners and entrepreneurial companies. And I do these educational videos to help people understand: What are the issues that get faced in a company, how can you mitigate risk, and what are the issues and questions to bring up with your attorney? You can learn more about me at AaronHall.com, and if you want a free resource that covers common problems in businesses and how to avoid them, go to AaronHall.com/free. When you go there, you enter your email address You will receive the guide by email, and then you will also have access to videos that explain how to avoid some of the other common problems faced by business owners so that you can avoid legal trouble in your company.